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The long game
Capital gains tax exemptions on company distributions
An individual and his spouse have retired and over many years had traded through a number of separate limited companies (incorporated and owned in equal shares 50/50).
The companies are now dormant, but £50,000 of cash and reserves were left in each company, in case funds were needed in the event that a decision was taken to recommence trading.
Having decided to retire completely, the married couple would like to withdraw funds from the companies in the most tax efficient way possible.
Can a dormant company pay dividends to reduce the cash balance to £24,000? At that stage, could the company be struck off voluntarily, with the remaining £24,000 being treated as a capital distribution?
The point is, if this exercise is repeated for each dormant company in turn over a number of tax years, how would HMRC treat the use of capital gains tax annual exemptions in this way?
I look forward to replies from Taxation readers.
Query 19,459 – Retiree.
At your discretion
Encashed offshore bond as funds to pay inheritance tax
My client died in September 2018. She was UK resident and was the settlor and beneficiary of a discretionary trust. A vulnerable person’s election was in place.
In March 2019, the trustees cashed in an offshore bond because funds were required to pay an inheritance tax liability. A six figure chargeable event gain arose on encashment.
My questions to readers are as follows:
- Who is liable to pay the tax?
- Should the gain be reported in the trust tax return, the personal return to date of death or the administration return from date of death to 5 April 2019?
I am aware that the position is rather more complicated when an encashment applies after death, but before the end of the tax year. Unfortunately, I have no practical experience of this; perhaps it is an unusual occurrence.
Leading on from who is taxed, I have the following additional questions.
- How will top slicing relief operate (12 years in this case) bearing in mind that if the gain was liable on the trustees this would not be available whereas if it applies to the settlor it will give a significant reduction to tax due.
- If the income tax liability on the gain was chargeable on the settlor but the trust reimbursed them, would that have any unintended consequences?
Taxation readers’ views will be very much appreciated.
Query 19,460 – Sliced and Diced.
Now you see it...
Holdover relief on share transfer under court order
I act on behalf of a client who is getting divorced and, as part of the proceedings, may have to transfer shares in his unquoted trading company to his spouse.
The capital gains tax exemption for transfers between spouses will not apply because they have been separated for a while. However, I always thought that if the transfer was under a court order then holdover relief under TCGA 1992, s 165 could be claimed. This seemed to be the prevailing view and appeared to be accepted by HMRC’s Capital Gains Manual at CG67192 (now archived). This was based on the case of G v G [2002] EWHC 1339 (Fam).
However, when I happened to recheck HMRC’s manual recently, I found that it has been rewritten which gave me an unpleasant surprise. The manual at CG66886 now seems to say that HMRC considers that s 165 is not (or at least is unlikely to be) available irrespective of whether a court order is involved.
This view appears to be based on an interpretation of an insolvency case, Haines v Hill [2007] EWCA Civ 1284. But that case dates back several years and there is no reference in the manuals to a change of view. I was unaware of this change and I have not read anything in the professional press.
Can Taxation readers shed any light on this situation?
Query 19,461 – Spouse.
Hotel
Sale of a trading business will qualify as a TOGC
I act for a client which has a VAT group registration, consisting of a property company (owning the freehold of a hotel) and a trading company (running the same hotel).
An option to tax election is in place for the property company on the hotel, but this has no effect because the rent charge from the property to the trading company is within the circle of the group; in other words, it is VAT exempt.
However, my client is now selling both the hotel business and the freehold property to a single buyer, A Ltd.
My understanding is that A Ltd must pay VAT on the value of the property because it will not be renting it out when acquired because it will be within its own trading company. Thus, there is no transfer of a business as a going concern (TOGC) opportunity.
My questions are as follows:
- Will the sale of the trading business qualify as a TOGC if the usual conditions are met?
- Are there any other issues for my client (or the buyer) to consider on VAT-related issues?
I very much look forward to hearing from readers.
Query 19,462 – Miss Hilton.
